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On 1 December 2022, the Central Bank of Ireland (“Central
Bank”) published a consultation paper (“CP152”) on own
funds requirements for UCITS management companies (“UCITS
ManCos”) and Alternative Investment Fund Managers
(“AIFMs”) authorised with a MiFID top-up to provide
discretionary portfolio management services.
Existing own funds requirements for UCITS ManCos and AIFMs are
set out in Regulation 17 of the UCITS Regulations1 and
Regulation 10 of the AIFM Regulations2 respectively.
Under these regulations the level of own funds required to be held
is directly proportional to the value of the funds managed under
the respective firms’ collective portfolio management
permission. These regulations do not take into account the value of
funds in individual portfolios managed by these firms.
In order to address the risk to the firm and clients when
providing these additional services, the Central Bank currently
requires, as a condition of authorisation, that such UCITS ManCos
and AIFMs comply with the own funds requirements in Regulation
18(2) of the European Communities (Capital Adequacy of Investment
Firms) Regulation 2006. Any additional capital required is included
in the Internal Capital Adequacy Assessment Process
(“ICAAP”), which must be updated at least annually.
Investment firms authorised under the MiFID
Regulations3 are now subject to the own funds
requirements under Regulation (EU) 2019/2033 on the Prudential
Requirements for Investment Firms (“IFR”).
In the Central Bank’s view, this leaves an uneven playing
field between MiFID investment firms, and UCITS ManCos and AIFMs,
performing similar services.
Therefore, it proposes to introduce domestic requirements to
prescribe the own funds requirements to apply to UCITS ManCos and
AIFMs authorised with a MiFID top-up to provide discretionary
portfolio management services.
CP152 proposes applying own funds requirements to the
discretionary management aspect of a UCITS ManCo / AIFM’s
business that are calculated in a similar manner to the own funds
requirements for investment firms under IFR, i.e. by reference to
Risk to Client K-Factors.
UCITS ManCos and AIFMs providing discretionary portfolio
management services will be required to have minimum own funds
equal to the higher of the:
- Total amount of initial capital and own funds which the UCITS
ManCo or AIFM is required to hold under the UCITS Regulations or
the AIFM Regulations, as applicable; or
- New Risk to Client K-Factor requirement.
The Risk to Client K-Factor is the sum of the following
K-Factors adjusted by the relevant co-efficient:
- K-AUM (“Assets Under Management”);
- K-CMH (“Client Money Held”);
- K-ASA (“Assets Safeguarded and Administered”);
- K-COH (“Client Orders Handled”).4
CP152 contains guidance on how and when the relevant
calculations should be made.
UCITS ManCos or AIFMs classified as a ‘small and
non-interconnected firm’ will not be required to calculate the
Risk to Client K-Factor when determining the own funds
Firms will have to put in place sound, effective and
comprehensive arrangements, strategies and processes to assess and
maintain an adequate level of internal capital on an ongoing basis
and to submit an ICAAP questionnaire annually to the Central
CP152 proposes amending the Central Bank UCITS
Regulations5 and the AIF Rulebook to formalise
Responses to CP152 must be submitted by 23 February 2023.
It does not state when the Central Bank UCITS Regulations and
AIF Rulebook will be amended.
It is proposed that UCITS ManCos and AIFMs will be permitted to
limit the increase in their own funds requirement arising from the
introduction of a K-Factor requirement to twice their fixed
overheads requirement for the period up to the end of June
1. S.I. No. 352/2011 – European Communities (Undertakings
for Collective Investment in Transferable Securities) Regulations
2. S.I. No. 257/2013 – European Union (Alternative
Investment Fund Managers) Regulations 2013
3. S.I. No. 375/2017 – European Union (Markets in
Financial Instruments) Regulations 2017
4. K-COH only applicable to AIFMs.
5. S.I. No. 230/2019 – Central Bank (Supervision and
Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective
Investment in Transferable Securities) Regulations 2019
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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